The Strangeness of Paying as You Go

musicgalJuly 13, 2014

I read the posts regarding budgets that are dependent upon amounts of money available fom the bank, and the accompanying concerns and worry involved in trying to cut costs. Over the past few years, I have become more convinced of the adage, "cash is king". But I wonder if anyone has really seen a substantial difference in price in materials or labor from paying from their own savings as opposed to using a bank. Do contractors or subs take advantage of clients with no bank supervision? Just curious.

I don't know if the process is different in the US, but the banks here won't pay until the work is done. So the builder has to have the finances to cover the work before the bank comes in. If they aren't paying cash, then they probably have an ongoing relationship with the sub. It's probably about the same whether you pay cash, or are guaranteed to be bringing more work.

Of all the quotes I've gotten so far (as an owner-builder), nobody has asked me how I'd be paying before giving me a price.

We did owner/builder last year and paid all the contractors in cash as well as most of the materials. The contractors always gave me discounts but I didn't bother asking for discounts on materials as the prices were very good already. Probably ended up being a 3-4% discount from the contractors.
I usually asked the contractors every week or so if they needed a draw and they would figure up the bill for work and I would offer a rounded off figure. When I say cash I mean $100.00 dollar bills right then..always got receipts and knew all my subs for a long time and never an issue.

I should add that all phases of the construction were bid and the draws just went off their original bid plus changes. I have been involved with these subs in several large residential developments and there was a lot of trust between all parties and my build went very smoothly.

It is rare that anyone can pay cash for a house and I can't think of a reason a contractor would care where the money came from unless he might feel more secure with a bank involved. The suggestion that cash is king is ignores the fact that the contractor doesn't know when the cash runs out.

If you are acting as the GC subs will definitely take advantage of you a bank might be of some help.

As an owner-builder, if we weren't able to get a significant start on the house without the draw mortgage, we were going to be required to submit very detailed quotes for EVERYTHING. So I suspect if there was a sub ripping us off, the bank would have said something. "Um, no. It doesn't cost $115k for stairs." :)

But, spending this kind of money directly out of our own pockets, we're being just as careful. We're getting multiple quotes, and have an experienced project manager for sanity checks.

We're also in a position to do an all-cash build, and I'd like to hear any possible advice on how to manage this well. We can afford to build what we want -- and, indeed, we are choosing to build much more modestly than most people on this board -- but we want to be sure we get value for every dollar.

Thank you all for your replies. From modest homes to high end mansions, I am acquainted with several couples our age who have paid off their mortgages and sold their city houses in a good market, enabling them to build their retirement houses without debt. We are following suit. There has been a subtle difference in the process this time. Just wanted to see what experiences other GW homeowners/builders may have to share about their own process.

Amberm- I find the Canadian process very interesting, in a variety of ways. In a way, all the red tape really allows time to mentally connect all the dots on your bid negotiatons, as frustrating as it is. Can just imagine how happy you will be when that lot really becomes your homestead.

We just recently started on our owner built house. We are building without a mortgage, so there will be no bank oversight.

We won't need very many contractors, mostly just an excavator, someone to finish the concrete slab, and some checking of our work by an electrician, so my experience is somewhat limited, but we are getting a significant discount on our excavation work by paying in cash. And i mean literal handing over of stacks of $100 bills, with no paper trail. Other people in my area have had the same experience of getting a discount for paying with cash.

Contractors in general won't bring it up, but for anyone who has the cash available and some basic trust of their contractors, I would highly encourage casually asking if the contractor has a "cash price" for their labor.

Paying cash won't help as much with materials, but paying for them yourself and supplying them to contractors can save you on mark ups.

Some contractors will take advantage of people, just like any other profession. Being knowledgeable about the work you are hiring them to do and getting multiple quotes i think will help prevent this more than the threat of a bank. Hire people referred by people you know. Have a basic idea of how much the work should cost. Be respectful. A bank won't help you with any of that.

Have signed contract yet, but the selected GC gets pissed off whenever I mentioned hire my own subs. I was even offer paying him to reasonable $ to supervise those subs works, and he has not responded yet. I may drop him and find other GC.

No. It was not that. At first, I let him does all the quotes, but later found out that some of his subs were not honest. And I told him way upfront if I could in case, he was ok. Until now, time to sign contract, he twisted his words.

Hello houses14- nice to see you here. Most GCs want to use their own crews because they are familiar with their quality of work and pricing structure. As millworkman said, most GCs are going to look at a project as an all or nothing affair. Our GC allowed us to pick our own crews for several important aspects of our new home, and ironically those aspects were a few of the items that came in exactly on bid.
We put on a Decra roof for example. Our GC had no one who had done Decra before in his resource pool, so we vetted and hired a company from a nearby city. We did the same with our stamped concrete because the GC did not have anyone he could recommend.
Our GC told us long ago that any cost savings we managed would be dependent on how much I liked to shop. I didn't exactly know what he meant then, but I do now. We have sourced things our crews said were impossible to find, and things that were much more inexpensive than what we were first told. So, each GC will have a slightly different approach. I encourage you to find someone with whom you feel comfortable.

We found the opposite to be true. Our builder preferred self-financing to us coming in with a construction loan. We made five payments at specific points along the way, and paid cash for change orders and upgrades (typical 50% at agreement, 50% at install).
It worked out to everyone's advantage.

This GC had built three homes recently from New York, Washington D.C., and New Jersey's owners. Therefore, they could have thought he is "cheap". I saw one of these owner has MDS moldings and trims in $800k in 3500SF , not even high end home, because this GC "talked" him into it to "save" $. To me, that is unacceptable. I think the GC may have pocket $150K at the least.

Could you share the percentage each time and stage that you pay?
Have a fixed contract builder who want way too much for deposit and payments, therefore I dropped him and going to go with cost plus fixed fees. Although, am so hesitate doing that.

we are having to get an engineered retaining wall, quoted at $13,600, when we offered to pay cash the company came down to 11k. That is a great savings. We also are getting a discount from the masons and drywallers for paying cash and will likely save 5-6k between them. I am in South Carolina.

You could still do cash and have a contract and paperwork. Maybe a 2-3% discount because the contractor doesn't have to wait a month (or 3) to get his money, or doesn't have to pay credit card company that fee.

But if you're getting a 20% discount because it's all under the table, that would make me very nervous. Especially on something like an engineered wall, or masonry. But maybe the $13k price is also without warranty?

No we are getting a warranty and invoices, but the checks or cash are made out to him and not his landscaping business. I am not sure about taxes, but honestly it is up to him and not me. I have had the GC negociate the discounts for me so far, except for the brick supplier. Him I called and asked if I could pay by credit card, and he gave me 1.5% off to pay by check instead.

In our neighborhood construction projects are mostly cash. The best builders provide detailed accounting of how every cent is spent. Every month at billing time I receive the following:

- a summary of the month's expenses
- daily/hourly breakdown of time/overtime for the builders' own employees, including their tax/FICA/etc. summaries
- a copy of the SOV showing progress for past applications & the current month's work, the scheduled total, and any change orders affecting a line item
- attached to this is a copy of every receipt received for materials or labor, down to gasoline for the generator from the local shell station. I give the supervisor a little cash on the side to buy the crews lunch every month as well, and he offered to provide receipts for that too if I wanted.

Every time he needs to contract a new trade, I get an email showing bids from a few subs bidding the the scope of work, with an explanation of the bid price from each & the pros/cons of working with each. Our project has a schedule so typically the explanation includes whether or not that sub has the ability to meet our schedule. There has been 110% transparency so far.

The markup is expensive, but this is the most amazing way to work with a builder. Since we agreed with the builder on his fee at the signing of the contract and it applies uniformly across everything he does, there is nothing but transparency beyond that and neither of us feels like we're trying to screw the other.

I have learned some truths with this process, boiling down to:

- you have to trust the people you work with and they have to trust you
- the people you work with should match your personality. If you are detail focused and want to be involved, you need to work with people that revel in that and optimize for it. otherwise you will just be frustrated and there will be many bad surprises.
- everything will cost much more than you thought in a custom project. have a big buffer.
- every time you have an "opinion" about how something should be done, it costs much more. the pictures on houzz are the best of the best and you pay for your home to look like that.
- you can never know too much about your property before you start work. legal docs, easements, topographicals, town regulations etc, all important to know.
- even if you feel you are 100% prepared, you've only going to do this once or twice in your life so you're still going to overlook something
- everyone is different, and so even if your builder has done this 100s of times he is going to overlook something
- unless you're doing very superficial remodeling, it's pretty much always better to scrape your lot and start over.
- there is no competition in city/county/etc bureaucracy so they have little incentive to help you and will take as long as they they are allowed to (and sometimes longer) can to serve you. you will be frustrated by this as you rack up delays and associated costs. this scenario is supported by your neighbors - all NIMBYs that hate new development that disrupts their way of life. don't worry, you'll be like them as soon as you're done.

I'm sure I'll add a few more items to this list by the time we're done!

Musicgal...Don't forget you will also save the interest you would pay on a construction mortgage while carrying that loan during the build. At 5-6%, that is thousands of dollars...So, something to consider even if you don't get a better price.

houses14, the following was part of our LoI and residential build contract:

Initial deposit of $7,500 paid with LOI execution
2nd payment of $7,500 paid with execution of this Residential Build Contract
3rd payment of $7,500 due upon receipt of all permits required for construction
4th payment of $7,500 due when roof is sheathed
5th and final payment of $5,000 due when drywall installed

None of this is based on a % of the total cost of the home; they are numbers that my builder uses for all of his self-financed builds. We found this arrangement to be VERY favorable.

I'm not sure what your question about draws is. We didn't have a construction loan. We made the five payments as I've detailed, and at closing that money was treated as a down payment (and we made an additional down payment) and our loan was for the contract price less those monies. Couldn't have been easier or more straightforward.

Farmhousegirl- Yes, there is nothing like the feeling of being debt free:) in this life, there are plenty of other bills to pay- but paying the bank more interest on a construction loan than they are paying on my savings account... well, just doesn't appeal to me:-)

A friend told me my contractor said we kept their subs from defaulting on their own mortgages last year. The end to the recession crept slowly up the freeway to our little burg. It is full speed ahead now around here, and I love the vitality of the area.